Running family business firms

It is not really unique to India, but the belief that, in a family business, the family has to be in business is not a widespread one in most western countries—at least not among the largest companies in those countries.

In India, in the past, this belief has, at least in part, driven some once-proud companies to the ground and destroyed a significant amount of shareholder wealth. Memories of those days—and those companies, some of which diversified into unrelated areas so as to find another member of the founding family something to do—have prompted many analysts to frown on a recent spate of appointments, by companies, of sons and daughters of their current chief executives or chairmen.

The appointments themselves are significant. They are in senior executive positions or in those that clearly indicate that the incumbent is on the fast track to the top. Yet, this newspaper has a different view than most analysts.

In some cases, the sons and daughters have been appointed to the board of, or in a senior position in, the holding company through which the family controls its business or businesses. This is as it should be. A well-governed holding company is the textbook way for a family to distinguish and demarcate ownership from management. And it is only fair that the family looks after its own interests by appointing family members to positions of power and influence in the holding company.

In other cases, the appointments have been to key executive positions in the family business group’s flagship or main company. In such instances, the key question is whether the appointment has been made by a nomination or selection committee which has adequate representation from the independent directors on the board of the company. If that is indeed the case, this newspaper has no complaints. If, however, the appointments have been made not by a selection committee, but by the appointee’s father or brother or some other relative, then there clearly is a problem. To be sure, the same would apply for appointments of non-family members to key executive positions that aren’t done through a selection committee.

While being born into a family shouldn’t qualify someone for the top post in the family business, it shouldn’t disqualify them either. There are enough people who have done well in executive positions in companies owned by their families. Just as there are enough professionals who have fared badly.

Should ownership and management be kept separate in family firms? Tell us at views@livemint.com